Furor Over Canadian Frauds May Lead To Big Changes For Advisors

By Cyril Tuohy

InsuranceNewsNet

As the calls to codify the financial advisor profession grow louder in the wake of multimillion-dollar frauds, Canadian insurance carriers are rethinking their mix of captive and independent agents to distribute products and services, an expert on the Canadian insurance market said.

Doug McPhie, insurance industry leader for Ernst & Young Canada, said carriers generally have two options: Either they rely on big independent management general advisors (MGAs), or they bring agents back in-house.

“With the increasing scrutiny by regulators around sales practices, carriers are looking for ways to ensure they have quality and compliant sales practices, and you have less control of that with independent agents,” McPhie said in an interview with InsuranceNewsNet.

Bringing agents back in-house allows carriers to keep a much tighter rein on aggressive sales practices, even if it costs carriers more money. 

Independent agents are often a more attractive business model for carriers, McPhie said. Independents represent lower fixed costs for insurers, but are more difficult to control because they are not exclusive to the insurer.

“Twenty years ago, they were all carrier agents, but a lot of insurance companies saw that as a fixed cost and turned it into a variable cost and let them be independent,” said McPhie, author of a recent report on the state of the Canadian life insurance market.

The independent agency system, however, has gone through recent consolidations. The largest management general advisors, which have grown to represent thousands of agents, have also seen fit to develop more robust ethical professional sales practices, McPhie said.

Great-West Life, one of the three largest life insurance companies in Canada, favors the captive-agent model, McPhie said. He explained that the two others, Manulife Financial and Sun Life Financial, as well as the smaller life carriers, tend to favor MGAs.

Canadian financial advisors have taken a beating recently after several advisors were found guilty of swindling individuals and institutions out of millions of dollars.

Last year, Royal Bank of Canada agreed to pay $17 million to settle a lawsuit with the victims of Earl Jones, an unregistered financial advisor who operated a Montreal-based financial services business for more than 20 years before he was convicted of defrauding more than 150 clients.

Jones, a self-styled financial advisor and planner, ran a Ponzi scheme similar to, but far smaller than, the one run by Bernard Madoff in the U.S.  Many of Jones’ clients were friends and family members.

In addition, regulators have settled with other bank employees for neglecting their fiduciary duty toward clients defrauded by Jones.

The financial advisor scandal, which sent shock waves through Canada’s strictly regulated financial services industry, has led to calls for more rules on the distribution of financial products among networks of far-flung agents and advisors.

Advisors, however, say they are more than capable of regulating themselves and don’t need more rules, even if it means a complete reassessment of how to police their own professional conduct and instill standards necessary to protect investors.

Greg Pollock, president and chief executive officer of the Financial Advisors Association of Canada, or Advocis, said in a webcast earlier this year that the time had come for financial advisors themselves, not regulators, to “take greater control of our profession.”

One way to do that is to impose a uniform standard governing continuing education (CE) credits for advisors.  “Anyone using the professional title of ‘financial advisor’ or carrying out the scope of work of a financial advisor should be required to maintain ongoing membership in an accredited professional association,” he said.

Some Canadian provinces, for example, require advisors to maintain their CE credits; others none at all.

Pollock also pointed to Canada’s siloed and fractured system of checking on the registration status of a financial advisor. Regulators are limited to checking only whether an advisor is licensed to do business in one financial services industry sector—insurance, mutual funds or securities—even when advisors often work across them all, Pollock said.

Cyril Tuohy is a writer living in Pennsylvania. He has covered the financial services industry for more than 15 years. He has also written about food, restaurants and travel. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].